Adverse Party

By: Martin M. Shenkman, CPA, MBA, JD

When determining how a trust will be treated for income tax purposes, the definition of "adverse party" is important. If certain prohibited powers are held by someone who is not an adverse party the trust will be treated as a grantor trust for income tax purposes. This means that the trust income will be taxed to the grantor. For purposes of the grantor trust provisions of the Internal Revenue Code, the term "nonadverse party" means any person who is not an adverse party. The term "adverse party" means any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust. A person having a general power of appointment over the trust property shall be deemed to have a beneficial interest in the trust.

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